Fed Chair Jerome Powell and a senior member of Congress are at odds over a report issued Tuesday by Senate Republicans alleging that China is trying to infiltrate the Federal Reserve and that the central bank has done too little to stop it.

The report by members of the Republican minority of the Senate Homeland Security and Governmental Affairs Committee alleges that China has used promises of lucrative teaching and research contracts to try to entice economists working at more than half of the system's 12 Federal Reserve Banks to share nonpublic information about economic forecasts and monetary policy decisions with Chinese officials.

China's goal, according to the report, is to “supplant the U.S. as the global economic leader and end the U.S. dollar's status as the world's primary reserve currency.”

In one case, the report alleges that a Fed economist was detained while traveling in China and threatened with arrest and retaliation against his family if he did not cooperate.

Variety of contacts

While the report paints an alarming picture, many of the details provided about Fed officials' contact with Chinese officials are not obviously nefarious. The central bank's researchers and officials regularly correspond and meet with their counterparts around the world, often exchanging information when they do so.

However, some of the activity described is clearly suspicious, including one Fed employee who was found to be researching articles on the prosecution of economic espionage, and who used a modified version of the name of Chinese President Xi Jinping as one of his computer passwords.

The report lays out five “case studies” that go into detail about unnamed Fed officials' contacts with China. The report notes that the Fed investigated the activities of the individuals involved to determine whether any information was provided to China in violation of Fed policy. In all five cases, the investigation “did not identify any policy violations.”

Nevertheless, the report alleges that the central bank has fallen short in responding to China's alleged efforts at infiltration, saying that the Fed “lacks sufficient counterintelligence expertise and cooperation with U.S. law enforcement and the U.S. Intelligence Community.”

It also claims that the Fed's policies and procedures are insufficient to counter the threat of Chinese infiltration, and criticizes the central bank for allowing employees to retain access to sensitive information after learning of their connections with Chinese organizations.

“I am concerned by the threat to the Fed and hope our investigation, which is based on the Fed's own documents and corresponds with assessments and recommendations made by the FBI, wakes the Fed up to the broad threat from China to our monetary policy,” said Senator Rob Portman, the ranking Republican on the committee. “The risk is clear. I urge the Fed to do more, working with the FBI, to counter this threat from one of our foremost foreign adversaries.”

Strong Fed response

The report generated a forceful rebuttal from Powell, who said the central bank's staff are well aware of their obligations to keep sensitive information secret.

In a letter addressed to Portman, Powell wrote, “Because we understand that some actors aim to exploit any vulnerabilities, our processes, controls and technology are robust and updated regularly. We respectfully reject any suggestions to the contrary.”

Powell, a Republican who was appointed Fed chair by former president Donald Trump in 2018, also took issue with the report's description of the activities of a number of individual Fed employees, saying that the central bank is “deeply troubled by what we believe to be the report's unfair, unsubstantiated and unverified insinuations about particular individual staff members.”

Chinese government response

Chinese officials criticized the report, saying it reflects outdated thinking about the relationship between the two countries.

In a statement emailed to VOA, Liu Pengyu, spokesperson for the Chinese embassy in Washington, said, “The remarks of the relevant U.S. congressmen are full of Cold War zero-sum thinking and ideological prejudice.”

He added, “The cooperation between China and the U.S. in economic, financial and other fields is open and aboveboard, which has played an important role in enhancing mutual understanding and mutual trust between the two countries. The U.S. should take off its colored glasses and stop disrupting local and non-governmental exchanges between the two countries.”

Talent recruitment programs

Portman has previously led other investigations into China's use of talent recruitment programs to develop connections with U.S. scientists and academics, allegedly in the service of obtaining proprietary information and technology.

The most prominent of these is the Thousand Talents Plan established in 2008, which offers top scientists and scholars across a number of disciplines financial incentives to come to China to teach or do research.

Tuesday’s report alleges that a number of Fed officials participated in the program or had relationships with a former Fed official who did. The report lays out five “case studies” that outline contacts that Fed employees had with Chinese officials and institutions, including multiple universities.

In 2021, the Fed instituted a new rule barring employees from accepting any outside compensation from “restricted” countries, including China.

'Individual A'

The most troubling of the case studies focuses on a Federal Reserve Bank economist identified as “Individual A.” The report alleges that in 2019, while visiting China, he was detained on four separate occasions by Chinese officials.

“The officials threatened Individual A's family, allegedly tapped his phones and computers, and copied the contact information of other Fed officials from Individual A's WeChat account,” according to the report.

In addition, they threatened him with imprisonment and demanded he share sensitive nonpublic data about the U.S. economy and Fed policies, including information about the deliberations of the Federal Open Market Committee, which sets U.S. interest rates.

The Fed reported the incident to the Federal Bureau of Investigation, and issued a warning to all of its economists about traveling to China. (VOA)

•FILE - An American flag flies over the Federal Reserve building in Washington, May 4, 2021. A report issued July 26, 2022, by Senate Republicans alleges that China is trying to infiltrate the Federal Reserve.

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